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How - and Whether - to Pick a Fund Family


Craig Smith, a New York businessman, uses several checkpoints when he invests in a mutual fund. Among them are the fund's track record and its management fees.

Not so important to him: Whether all his funds are in the same "family" - offered by the same company. Of the four mutual funds that Mr. Smith and his wife are invested in, only two are in the same family.

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Yet many investors for convenience stick with one large, well-known family.

With 425 fund families and thousands of mutual funds out there, what's the right course for the small investor? Stick within one fund group? Dabble in many families? Buy through a discount broker, where you can essentially create your own family by selecting funds from several companies to hold in your account?

"If you are just investing all of your assets in one family of funds, you are trading off selectivity for convenience," says John Markese, president of the American Association of Individual Investors, a small-investors' group in Chicago. That's a faulty approach, he says, and could result in lower returns. "You should first determine what you need in terms of a portfolio, based on your particular investment objectives. Then you buy the very best funds that you can get to meet that goal."

"If a person is a novice [investor], then it may be wise to go with a large family of funds," argues Sheldon Jacobs, editor of the No-Load Fund Investor, in Irvington-on-Hudson, N.Y. Larger families usually offer better services, he says. And if a manager quits, the larger family is likely to quickly tap a first-rate replacement.

As of December 1995, about 65 percent of all assets were in the top 20 fund families, down from 73 percent in 1984. The reason for the decline: An increase in the number of smaller or mid-sized funds.

Financial experts generally cite several factors for individuals to weigh when deciding which fund groups to buy into:

Services. Fund families can provide a broad range of services, including telephone redemptions, electronic transfers of earnings to any bank account, and automated switching between funds. Make sure the services important to you are available. Find out what the minimum deposits are to enter the funds, for example, or whether there is a transfer fee for moving money between funds.

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By going with a discount broker such as Charles Schwab & Co., you'll get many of these services along with an ability to hold funds from many families within a single account. Schwab's program is called One Source. Fidelity Investments, a discount broker as well as a fund group, offers non-Fidelity funds through its Funds Network.

Performance. A fund family is only as good as its individual funds. Dr. Markese suggests that you look for solidly performing funds that have consistently been in the top 25 percent of their peer group for the past five years. Because even strong past results don't guarantee future performance, some analysts praise "index" funds that track the overall market. The Vanguard Group is known for low-fee index funds that cover small companies, bonds, and overseas markets as well as blue-chip stocks. Last year, across-the-board market gains helped Vanguard's index-heavy stock funds outperform Fidelity's stock funds. But many actively managed stock funds have solid track records.

"Don't overlook little families, which may have some funds that are doing extremely well," advises John Tompkins, who writes a column called "Portfolio" on the Internet's Money Talks network.

Diversification. You don't want all your eggs in one basket, so make sure the funds available to you will be sufficiently diverse for your taste. Having quick access to a wide range of funds, as in a large fund family or a discount brokerage, is helpful. That's especially true at a time of stock-market uncertainty, such as today.

Risk. You need to be aware of what risk there might be in a fund family's approach, says Michelle Smith, managing director of the Mutual Fund Education Alliance, a trade group in Kansas City, Mo. Weigh the investing style against your own tolerance for possible loss, she says. Some fund families offer a variety of styles. Vanguard, for example, even has index funds reflecting both "value" and "growth" styles.

Some fund families specialize in offering contrarian or defensive funds that can weather market storms better than aggressive-growth or index funds.

Fees. Fees, including everything from up-front commissions ("loads") to annual management charges, vary widely across fund families. If excessive, they can seriously dent your total returns. Many experts recommend sticking to no-load families.

Values. Some fund groups and individual funds cater directly to investors with a social conscience, eschewing investments in tobacco stocks, for example; among these are Domini, Calvert, Citizens Trust, and the Pax World Fund.

The Mutual Fund Education Alliance offers a fund-investing guide for $19.50. Write to the group at Dept. 0148, P.O. Box 419263, Kansas City, Mo., 64193-0148.

Top 10 Mutual Fund Groups

Total assets

Group in billions*

Fidelity 302.6

Vanguard 172.5

American Funds 151.6

Franklin/Templeton 103.7

Putnam 89.5

Merrill Lynch 64.3

T. Rowe Price 53.3

IDS 49.6

Dean Witter Funds 41.9

Twentieth Century/Benham 41.8

*As of 5/31/96. Excludes money-market funds.

Source: Morningstar

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